Likely Tariff Implications of Bujagali Dam

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Date: 
Tuesday, July 17, 2001

Submitted to the World Bank July 17, 2001
by International Rivers

Leaked details of the secret 30–year Power Purchase Agreement (PPA) for Bujagali Dam appear to confirm concerns that the project will result in major price hikes to Ugandan consumers thus hindering efforts to increase the extremely low levels of access to electricity in Uganda and harming the country’s economy.

Given the major concerns over the terms of PPAs for other private sector power projects such as Enron’s Dabhol project in India, the San Roque Dam in the Philippines, and various coal–fired power plants in Indonesia (see attached articles) it would be highly irresponsible for World Bank/IFC to proceed with the Bujagali Project without public review of the terms of the Bujagali PPA and of other options for meeting Ugandan energy needs. Current uncertainties over the impact of the ongoing unbundling and privatization of the Ugandan power sector and of future demand for Ugandan power raise further concerns over the responsibility of moving forward with a major power plant such as Bujagali at this time.

International Rivers has obtained an analysis of some provisions of the confidential PPA from an energy economist working in Uganda’s power sector. According to this analyst, the PPA guarantees AES payments of US$100 million per annum for the first 10 years of project operation, with the payments decreasing somewhat for the subsequent 20 years. The Ugandan government is committed to ending subsidies to the power sector, therefore all costs are to be passed onto the consumer. The PPA appears to guarantee payments to AES regardless of power demand or the availability of power from the dam, thus transferring market and hydrological risks from the developer to the Ugandan consumer.

Presuming the project comes online as planned in 2005, and accepting the extremely high estimates of demand growth used by project proponents, the marginal cost of power from Bujagali to the off–taker in 2005 would be 557 Ush/KWh, or US$0.18/KWh using the presumed 2005 exchange rate (see calculations below). The cost to the consumer would obviously be considerably higher to reflect overheads and profit of transmission and distribution companies. By comparison, the state of California has recently secured long–term contracts for gas–fired power at an average rate of $0.08/KWh.

Retail prices for power in Uganda have recently undergone massive hikes due to the removal of subsidies in preparation for privatization (see attached articles). Per kilowatt prices to small domestic users have increased from 20 shillings to 50 shillings, and for large industrial users from 75 shillings to 172 shillings. The marginal cost of Bujagali power in 2005 to the offtaker would thus be more than 3 times the post–hike retail charges to large industrial users and more than 11 times post–hike charges to small domestic users.

According to press accounts (see attached), the recent rate hikes could have serious impacts on both domestic and industrial consumers. "With this, manufacturing has no future in this economy," says one economist in Uganda. "People manufacture for half the cost in Far East and still undercut local producers ... they better start closing shop." According to government controlled newspaper New Vision, "Manufacturers, traders and domestic power users interviewed . . . were bitter that the abrupt power hikes could force them out of business. Many domestic users expressed plans to use kerosene and other cheaper fuels."

The political sustainability of the rate hikes are in doubt due to the angry public reaction. According to New Vision "[President] Museveni said he did not attend the Cabinet meeting that endorsed the power rate hikes. ’I will fight it like I have fought many other wars. I don’t agree that the power consumers should be made to pay for building a new dam."

There is considerable uncertainty over how much power can be exported to Kenya from Bujagali and at what price. Our calculations assume exports of 250 GWh/yr. This is an optimistic figure as power analysts put likely exports in 2005 at 150–250 GWh. Lower exports will raise further the marginal cost of Bujagali power. The price to be paid by Kenya is still undecided. If Kenya is unwilling to pay the high marginal cost of US$0.18/KWh prices to Ugandan consumers will have to be raised to cover the shortfall and Ugandans will effectively be subsidizing Kenyan consumers.

Numerous implications follow from the reaction to current rate hikes and the sweetheart deal given to AES in the Bujagali PPA. If the rate hikes hold they are likely to suppress demand growth, making the marginal cost of power from Bujagali even more expensive and eroding the supposed justification for such a large dam. Further rate hikes to pay for Bujagali will only suppress demand further.

Only 3% of Ugandans are connected to the grid. According to a World Bank ESMAP report, even at the 1996 tariff level, "No more than 7% of [Uganda’s] total population can afford unsubsidized electricity." Electricity from Bujagali would only be affordable to a tiny minority of Ugandans and the project would hinder rather than help expand access to electricity in the country.

If current rate hikes are even partially reversed this will call into question the feasibility of Uganda’s power sector privatization and thus the institutional and economic context within which Bujagali is to be built. Reversing the hikes would also imply that it will be impossible to force consumers to pay the costs of Bujagali’s power, presumably meaning that responsibility for the payments to AES will have to be transferred onto Ugandan taxpayers as a whole.

The political, contractual and financial fiascos of projects such as Enron’s Dabhol plant, the Indonesian coal IPPs, and Pakistan’s Hub River plant are likely to be repeated in Uganda if World Bank/IFC moves forward with AES’s Bujagali Dam.

The IFC’s project manager for Bujagali, Ron Anderson, said at a meeting with International Rivers on Dec. 13, 2000, that the cost of Bujagali power was "unknown" at that time and would be "an appraisal issue" to be determined after privatization. Anderson also stated that "If the project proceeds at the IFC, it will be because Bujagali fits into the country assistance strategy on providing electricity for the poor. If we can’t make that connection, we don’t have a project."

Before the IFC/World Bank moves forward with Bujagali it is clearly necessary to:

1) Publish the Bujagali PPA and hold public consultations on its implications for Ugandan consumers and taxpayers, and in particular to establish that Bujagali will increase access to electricity among Uganda’s low–income majority.

2) Carry out a participative review of options for Uganda’s power sector along the lines of the options assessment process recommended by the World Commission on Dams.




Assumptions and calculations behind tariff estimates:

Electricity Demand

  • Current consumption of electricity in Uganda = 870 GWh

  • Projected annual rise in demand for electricity in Uganda = 8%

  • Domestic Consumption of Electricity in Uganda in 2005 = 870 (1.08)^4 =1185 GWh

  • Expected export of electricity from Uganda 2005 = 250 GWh

  • Total electricity generated in Uganda 2005 = 1435 GWh

  • Electricity supplied by Bujagali = 1435–870 = 565 GWh

Annual Payment to AES in 2005

  • Current exchange rate = 1800 Ush/$

  • Historical depreciation rate = 15%

  • Expected exchange rate in 2005 = 1800 Ush/$ (1.15)^4 = 3150 Ush/$

  • Payment to AES in 2005 = (3150 Ush/$) ($100,000,000) = 315,000,000,000 Ush

    Marginal Cost of Bujagali Power

  • Payment to AES divided by electricity supplied by Bujagali in 2005 = 315,000/565 = 557 Ush/KWh

Assumptions

  • As almost all existing Ugandan supply is hydro there are no economic benefits from substituting existing supply with supply from Bujagali (there would likely be substitution benefits if existing supply was dependent on fuel purchases).

  • All new capacity between 2001 and 2005 comes from Bujagali (the only other planned capacity additions are very small off–grid plants )

More information: 

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